Fed head Yellen stole the show during the Jackson Hole Symposium so I’ve decided to turn the spotlight on other important announcements from the central bankers during the same event. Are we about to see major monetary policy changes soon?
BOJ Governor Haruhiko Kuroda
Contrary to Yellen’s relatively hawkish remarks, Bank of Japan Governor Kuroda’s testimony was far from upbeat as he confirmed that the Japanese economy could use more stimulus.
So far, price levels have been sliding for five months in a row, with the national core CPI down 0.5% on a year-over-year basis in July. Japan’s GDP grew by a feeble 0.2% in the second quarter of the year, representing a sharp slowdown from the 2.0% expansion in the earlier period.
Kuroda explained that they need to boost inflation expectations closer to their price stability target, utilizing any of the monetary policy tools in their shed “without hesitation.” These tools comprise asset-buying, monetary base guidance, and negative interest rates, but Kuroda did say that BOJ policymakers will carefully consider which among these schemes might work best. These discussions are likely to take place during the next BOJ meeting on September 20-21, which gives market participants enough time to price in expectations of aggressive stimulus efforts from the Japanese central bank.
ECB Executive Board Member Benoit Coeure
Price stability was also the main focus of ECB member Benoit Coeure’s testimony, which zoomed in on how short-term interest rates could be pushed to the effective lower bound more frequently if the economy continues to weaken.
Coeure added that unconventional monetary policy tools might need to be used if government action and fiscal policy adjustments aren’t enough to keep euro zone economies afloat. Keep in mind that, while ECB Governor Draghi may be enjoying more screen time, Coeure is actually the board member responsible for market operations so he could call the shots in terms of expanding asset purchases.
The rest of Coeure’s speech delved into the financial stability risks and other potential side effects of keeping rates too low for too long, reiterating the need for the ECB to get more creative with its stimulus measures and for euro zone national governments to step up their game in shoring up growth and inflation.
In a nutshell, these testimonies suggest that the monetary policy biases of the BOJ and the ECB are on the opposite side of the spectrum from the Fed’s hawkish stance. This could mean long-term trade opportunities for USD/JPY and EUR/USD, depending of course on whether or not economic data continue to support these policy expectations.
For this week, we’ve got Japan’s household spending and retail sales data coming up on Tuesday’s Asian trading session ahead of the euro zone’s flash CPI estimates on Wednesday. The U.S. non-farm payrolls figure is due on Friday and a strong jobs report could reinforce Fed rate hike expectations and dollar gains while downbeat results could force the currency to retreat.
Got any other currency pairs on your watch list based on these Jackson Hole testimonies? Don’t be shy to share your ideas in our comments section below!